Weaknesses found in three banks during stress test

As a result of a stress test conducted in the European Union, three banks failed to meet mandatory capital requirements, which led to the theoretical destruction of 496 billion euros from their reserve funds. This was reported by Reuters.

The inspection covered 70 banks, which is 20 more than in 2021, of which 57 were in the euro area. The stress test was overseen by the European Central Bank, which accounts for approximately 75% of EU banking assets.

As a result of the test, 8 of the 14 German banks scored below the EU average in terms of CET1 (Common Equity Tier 1) and leverage ratio. The best performers were mainly subsidiaries of American giants such as Goldman and JPMorgan or financial divisions of companies such as Volkswagen Bank.

The French bank La Banque Postale, whose capital was almost completely wiped out in the unfavorable scenario, said that the test did not take into account changes in the new accounting rules that would have mitigated the impact of market shocks.

The European Banking Authority (EBA) does not disclose the names of banks that failed the stress test completely.

The main purpose of the stress test was to examine the impact of a three-year scenario until 2025 of credit, market and operational risk losses on the bank's required capital buffer. The scenario assumed a 6% drop in economic growth and a significant decline in real estate prices.

Bank stress tests have become a common means of scrutiny in Europe and the United States since the global financial crisis of 2008, when some capital-starved lenders had to be bailed out by taxpayers. They have now become a standard procedure to ensure that banks can ensure the resilience of the economy, even in times of stress in financial markets.